WHAT ARE THE EXCEPTIONS TO THE CAPITAL GAINS TAX RULE?
Disposition of Principle Residence, Transfers of property to your spouse or common-law partner or to a trust for your spouse or common law partner, any capital gain resulting from the donation of an ecologically sensitive land and selling or donating certified Canadian cultural property (national treasures) to an institution or public authority.
SUMMARY OF THE LAW
Principle Residence Exemption
The main exemption is the principle residence exemption. If the property was a principle residence for every year that it was owned, the owner upon selling or otherwise disposing of the property does not have to report the sale on their income tax and benefit return and they do not need to pay capital gains taxes. If the property was not a principle residence for every year that it was owned, the part of the capital gain on the property that relates to the years for which it was not designated should be reported. Starting with the 2016 tax year, basic information such as date of acquisitions, proceeds of disposition and description of the property must be reported on Schedule 3, Capital Gains of T1 for properties sold on or after January 1, 2016 for the individual to be able to claim the full principle residence exemption. It should be noted that this exemption applies to deemed dispositions. A deemed disposition can occur for example when there is a change in the use of the property to a rental or business operation. Late designations of property as principle residence might be accepted by the CRA but a penalty will apply.
Other situations where capital gains can be triggered includes:
- Exchanging one property for another
- Giving away property as a gift
- Transferring certain property to a trust
- Property is expropriated
- Property is destroyed
- Leaving Canada
- Death of Owner
A property qualifies as principle residence for any year if it meets all the following four conditions:
- it is a housing unit, leasehold interest in a housing unit, or a share of a capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation
- property is owned alone or jointly
- owner, current or former spouse or common law partner, or any of children lived in it at some time during the year
- owner designated the property as their principal residence
The land upon which the house is located can be part of the principle residence but it is usually limited to ½ hectare (1.24 acres) unless owner can show that they need more of that land to enjoy their home (ie. Minimum lot size imposed by municipality is larger than ½ hectare).
Transfers of property to your spouse or common-law partner or to a trust for your spouse or common law partner
Generally, there is no capital gains or losses if owner gives capital property to their spouse or common-law partner, a spousal or common-law partner trust or a joint spousal or common law partner trust or an alter ego trust. This is because when the gift is gifted, the owner is considered to have disposed of the property for either a. the undepreciated capital cost for depreciable property or b. The adjusted cost base for other types of capital property.
NOTE: If property is transferred or loaned to spouse or common law partner, a person who has since became spouse or common law partner or trust for spouse or common law partner, and that spouse or common law partner sells the property during the owner’s life time, the owner usually needs to report any capital gains or losses if at the time of the sale: a. owner is a resident of Canada b. both are married or living in a common-law relationship
An owner may also be entitled to an inclusion rate of zero on any capital gain resulting from the donation of an ecologically sensitive land (including a covenant, an easement, or in Quebec, a real servitude) donated to certain qualified donees other than a private foundation where conditions are met. These gifts should still be reported.
An owner may not need to report a capital gain when they sell or donate certified Canadian cultural property (national treasures) to an institution or public authority designated by the Minister of Canadian Heritage.
TABLE OF AUTHORITIES
Canada Revenue Agency, Guides and Bulletins.
Ross Mirian, Barrister and Solicitor
Mahnoosh Montazeri, Articling Student.